EYE ON
AMERICA Moderate growth and a bull market
By Peter Morici
Each
month, I respond to the Bloomberg and Reuters
surveys of Wall Street and corporate economists
for the medium-term economic outlook. Here is my
latest forecast.
In a nutshell, the US
economy should stabilize in the fourth quarter and
gradually rebound in 2007, if energy prices do not
rise significantly and adjustments in housing
prices do not cause a
large, abrupt increase in
consumer savings. Overall the economy should grow
at a 2.1% annual rate in the fourth quarter and
average 2.6% in 2007.
The national median
price for existing homes fell from US$230,000 in
July to $220,000 in September, or 4.3%. Overall,
prices should fall about 10% before the adjustment
is complete.
US housing starts averaged
2.068 million in 2005, and fell from 2.265 million
in January to 1.486 million in October, on a
seasonally adjusted basis. My forecast assumes
housing starts bottom out in the fourth quarter or
early next year and average 1.6 million in 2007.
Growth accelerating from 2.1% in the
fourth quarter to 3.1% the second half of 2006
will not be enough to keep unemployment from
rising. The US unemployment rate should increase
from about 4.5% in the fourth quarter to about
4.8% by the end of next year.
Productivity
growth will be decent but down from the strong
performance of recent years. Large trade deficits
have shifted workers from export and
import-competing goods and services, where
productivity and investments in research and
development are substantially above average, to
lower-value-added sectors of the economy.
The long-term corrosive consequences of an
overvalued dollar and national trade policies,
which result in export growth significantly
lagging import growth and large foreign borrowing
to finance the difference, are taking a toll on
productivity and the growth potential of the US
economy.
More than 85% of the foreign
capital flowing into the United States has been to
finance consumption, as opposed to direct
investment in new productive assets. Slower
productivity growth is the inevitable outcome. A
debtor's life always leaves a trail of tears.
The third quarter may well prove the low
point of the current US economic cycle.
Second-quarter growth was 2.6%, and third-quarter
growth will likely be adjusted from the 1.6%
preliminary estimate to 1.8% when the final data
are tallied.
In the third quarter, higher
prices for imported petroleum took a big bite out
of demand for domestic goods and services. In the
fourth quarter, the housing slowdown has affected
consumer expectations, but retail sales, ex the
automobile sector, have remained resilient; the
big drop in gasoline prices has helped a lot.
Housing values are still up nearly 50%
from early 2001. Even with a moderate
housing-market adjustment, Americans are much
wealthier than they were three and five years ago.
The key question remains: Will Americans
focus on the modest decline in home prices and
save more, or will they focus on the long-term
gains they have enjoyed and are likely to sustain?
My forecast bets homeowners will save more but not
enough to keep consumer spending from advancing at
a moderate pace.
Elsewhere, commercial
construction in the US has been showing more
bounce and industrial capacity is close enough to
peak utilization to require new investments in
equipment and technology.
The combination
of moderating, but not declining, consumer
spending and more robust investment in commercial
construction, equipment and technology should be
enough to keep the US economy growing at a
moderate, but not robust, pace.
The
picture could be dramatically improved by better
exchange rates and trade policies. Reducing the
trade deficit would lift aggregate demand for
US-made goods and services. Shifting employment
from non-tradable goods and services to export and
import-competing industries would give
productivity growth and the potential supply of
goods and services a needed boost. Cutting the
trade deficit in half could lift growth in gross
domestic product to about 4% a year.
In
2007, the adjustment in the housing market should
further benefit the stock market. In recent years,
Americans have been pouring more and more of their
disposable income into house payments to purchase
ever more expensive houses, and saving less as a
byproduct. When housing prices pull back,
Americans tend to shift from investing in housing
to investing in paper assets, and that includes
stocks. The simple calculus of supply and demand
would indicate that stock prices should rise.
Also, many large US corporations earn
significant shares of their profits abroad. Growth
abroad is expected to exceed US performance in
part because of the demand created by large trade
deficits. That will be good for big cap stocks,
and the benefits should spread to the rest of the
market.
Overall, in 2007, expect moderate
growth and a bull market.
Peter
Morici is a professor at the University of
Maryland School of Business and former chief
economist at the US International Trade
Commission.
